LOANS AND LEASES

BancShares' accounting methods for loans and leases differ depending on whether they are purchased credit-impaired (PCI) or non-PCI. Non-PCI loans and leases include originated commercial, originated noncommercial, purchased non-impaired loans, purchased leases and certain purchased revolving credit. For purchased non-impaired loans to be included as non-PCI, it must be determined that the loans do not have any credit deterioration at the time of acquisition. Conversely, loans for which it is probable at acquisition that all required payments will not be collected in accordance with contractual terms are considered impaired and, therefore, classified as PCI loans. PCI loans are accounted for under the guidance in ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. PCI loans are recorded at fair value at the date of acquisition. No allowance for loan and lease losses is recorded on the acquisition date as the fair value of the acquired assets incorporates assumptions regarding credit risk over the life of the loans. An allowance is recorded if there is additional credit deterioration after the acquisition date. See Note A for additional information on PCI and non-PCI loans and leases.

BancShares reports PCI and non-PCI loan portfolios separately, and each portfolio is further divided into commercial and non-commercial based on the type of borrower, purpose, collateral, and/or our underlying credit management processes. Additionally, commercial and non-commercial loans are assigned to loan classes, which further disaggregate loans based upon common risk characteristics.

Commercial – Commercial loan classes include construction and land development, commercial mortgage, other commercial real estate, commercial and industrial, lease financing and other.

Construction and land development – Construction and land development consists of loans to finance land for development, investment, and use in a commercial business enterprise; multifamily apartments; and other commercial buildings that may be owner-occupied or income generating investments for the owner.

Commercial mortgage – Commercial mortgage consists of loans to purchase or refinance owner-occupied nonresidential and investment properties. Investment properties include office buildings and other facilities that are rented or leased to unrelated parties.

Other commercial real estate – Other commercial real estate consists of loans secured by farmland (including residential farms and other improvements) and multifamily (5 or more) residential properties.

Commercial and industrial – Commercial and industrial consists of loans or lines of credit to finance corporate credit cards, accounts receivable, inventory and other general business purposes.

Lease financing – Lease financing consists solely of lease financing agreements for business equipment, vehicles and other assets.

Other – Other consists of all other commercial loans not classified in one of the preceding classes. These typically include loans to non-profit organizations such as churches, hospitals, educational and charitable organizations, and certain loans repurchased with government guarantees.

Noncommercial – Noncommercial loan classes consist of residential and revolving mortgage, construction and land development, and consumer loans.

Residential mortgage – Residential real estate consists of loans to purchase, construct or refinance the borrower's primary dwelling, second residence or vacation home.

Revolving mortgage – Revolving mortgage consists of home equity lines of credit that are secured by first or second liens on the borrower's primary residence.

Construction and land development – Construction and land development consists of loans to construct the borrower's primary or secondary residence or vacant land upon which the owner intends to construct a dwelling at a future date.

Consumer – Consumer loans consist of installment loans to finance purchases of vehicles, unsecured home improvements, student loans and revolving lines of credit that can be secured or unsecured, including personal credit cards.

Loans and leases outstanding include the following at December 31, 2017 and 2016:



(Dollars in thousands)	December 31, 2017		December 31, 2016
Non-PCI loans and leases:
Commercial:
Construction and land development	$	669,215	$	649,157
Commercial mortgage	9,729,022		9,026,220
Other commercial real estate	473,433		351,291
Commercial and industrial	2,730,407		2,567,501
Lease financing	894,801		826,270
Other	302,176		340,264
Total commercial loans	14,799,054		13,760,703
Noncommercial:
Residential mortgage	3,523,786		2,889,124
Revolving mortgage	2,701,525		2,601,344
Construction and land development	248,289		231,400
Consumer	1,561,173		1,446,138
Total noncommercial loans	8,034,773		7,168,006
Total non-PCI loans and leases	22,833,827		20,928,709
PCI loans:
Commercial:
Construction and land development	13,654		20,766
Commercial mortgage	358,103		453,013
Other commercial real estate	17,124		12,645
Commercial and industrial	6,374		11,844
Other	1,683		1,702
Total commercial loans	396,938		499,970
Noncommercial:
Residential mortgage	299,318		268,777
Revolving mortgage	63,908		38,650
Construction and land development	644		—
Consumer	2,190		1,772
Total noncommercial loans	366,060		309,199
Total PCI loans	762,998		809,169
Total loans and leases	$	23,596,825	$	21,737,878

At December 31, 2017, $67.8 million of total residential loans and leases were covered under shared-loss agreements with the FDIC, compared to $84.8 million at December 31, 2016. The shared-loss agreements, for their terms, protect BancShares from a substantial portion of the credit and asset quality risk that would otherwise be incurred.

At December 31, 2017, $8.75 billion in noncovered loans with a lendable collateral value of $6.08 billion were used to secure $835.2 million in FHLB of Atlanta advances, resulting in additional borrowing capacity of $5.24 billion. At December 31, 2016, $8.26 billion in noncovered loans with a lendable collateral value of $5.50 billion were used to secure $660.2 million in FHLB of Atlanta advances, resulting in additional borrowing capacity of $4.84 billion. At December 31, 2017, $2.77 billion in noncovered loans with a lendable collateral value of $2.08 billion were used to secure additional borrowing capacity at the Federal Reserve Bank (FRB). There were no loans used to secure additional borrowing capacity at the FRB at December 31, 2016.

Certain residential real estate loans are originated to be sold to investors and are recorded in loans held for sale at fair value. Loans held for sale were $51.2 million and $74.4 million at December 31, 2017 and 2016, respectively. In addition, we may change our strategy for certain portfolio loans and sell them in the secondary market. At that time, portfolio loans are transferred to loans held for sale at the lower of amortized cost or market. During 2017, total proceeds from sales of loans held for sale were $823.5 million of which $162.6 million in sales were transferred to loans held for sale from the residential mortgage portfolio, resulting in a gain of $1.0 million. During 2016, total proceeds from sales of loans held for sale were $874.8 million of which $77.7 million in sales were transferred to loans held for sale from the residential mortgage portfolio, resulting in a gain of $3.8 million.

Net deferred fees on originated non-PCI loans and leases, including unearned income, unamortized costs and fees, were $1.7 million and $6.7 million at December 31, 2017 and December 31, 2016, respectively. The unamortized discount related to purchased non-PCI loans and leases in the Guaranty, Cordia and First Citizens Bancorporation, Inc. (Bancorporation) acquisitions was $14.2 million, $2.7 million and $18.1 million at December 31, 2017, respectively. At December 31, 2016, the unamortized discount related to purchased non-PCI loans and leases from the Cordia and Bancorporation acquisitions was $4.2 million and $27.4 million, respectively. During the years ended December 31, 2017 and December 31, 2016, accretion income on purchased non-PCI loans and leases was $13.6 million and $14.3 million, respectively.

Loans and leases to borrowers in medical, dental or related fields were $4.86 billion as of December 31, 2017, which represents 20.6 percent of total loans and leases, compared to $4.66 billion or 21.5 percent of total loans and leases at December 31, 2016. The credit risk of this industry concentration is mitigated through our underwriting policies which emphasize reliance on adequate borrower cash flow rather than underlying collateral value and our preference for financing secured by owner-occupied real property. Except for this single concentration, no other industry represented more than 10 percent of total loans and leases outstanding at December 31, 2017.

Credit quality indicators

Loans and leases are monitored for credit quality on a recurring basis. The credit quality indicators used are dependent on the portfolio segment to which the loan relates. Commercial and noncommercial loans and leases have different credit quality indicators as a result of the unique characteristics of the loan segment being evaluated. The credit quality indicators for non-PCI and PCI commercial loans and leases are developed through a review of individual borrowers on an ongoing basis. Commercial loans are evaluated periodically with more frequent evaluations done on more severely criticized loans or leases. The credit quality indicators for PCI and non-PCI noncommercial loans are based on the delinquency status of the borrower. As the borrower becomes more delinquent, the likelihood of loss increases. The indicators represent the rating for loans or leases as of the date presented based on the most recent assessment performed. These credit quality indicators are defined as follows:

Pass – A pass rated asset is not adversely classified because it does not display any of the characteristics for adverse classification.

Special mention – A special mention asset has potential weaknesses that deserve management’s close attention. If left uncorrected, such potential weaknesses may result in deterioration of the repayment prospects or collateral position at some future date. Special mention assets are not adversely classified and do not warrant adverse classification.

Substandard – A substandard asset is inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Assets classified as substandard generally have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. These assets are characterized by the distinct possibility of loss if the deficiencies are not corrected.

Doubtful – An asset classified as doubtful has all the weaknesses inherent in an asset classified substandard with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable on the basis of currently existing facts, conditions and values.

Loss – Assets classified as loss are considered uncollectible and of such little value that it is inappropriate to be carried as an asset. This classification is not necessarily equivalent to any potential for recovery or salvage value, but rather that it is not appropriate to defer a full charge-off even though partial recovery may be affected in the future.

Ungraded – Ungraded loans represent loans that are not included in the individual credit grading process due to their relatively small balances or borrower type. The majority of ungraded loans at December 31, 2017 and December 31, 2016 relate to business credit cards. Business credit card loans are subject to automatic charge-off when they become 120 days past due in the same manner as unsecured consumer lines of credit. The remaining balance is comprised of a small amount of commercial mortgage, lease financing and other commercial real estate loans.

The composition of the loans and leases outstanding at December 31, 2017, and December 31, 2016, by credit quality indicator is provided below:



	December 31, 2017
(Dollars in thousands)	Non-PCI commercial loans and leases
Grade:	Construction and land development		Commercial mortgage		Other commercial real estate		Commercial and industrial		Lease financing		Other		Total non-PCI commercial loans and leases
Pass	$	665,197	$	9,521,019	$	468,942	$	2,511,307	$	883,779	$	298,064	$	14,348,308
Special mention	691		78,643		1,260		44,130		4,340		2,919		131,983
Substandard	3,327		128,848		3,224		18,617		6,585		1,193		161,794
Doubtful	—		262		—		385		—		—		647
Ungraded	—		250		7		155,968		97		—		156,322
Total	$	669,215	$	9,729,022	$	473,433	$	2,730,407	$	894,801	$	302,176	$	14,799,054

	December 31, 2016
	Non-PCI commercial loans and leases
	Construction and land development		Commercial mortgage		Other commercial real estate		Commercial and industrial		Lease financing		Other		Total non-PCI commercial loans and leases
Pass	$	645,232	$	8,821,439	$	347,509	$	2,402,659	$	818,008	$	335,831	$	13,370,678
Special mention	2,236		76,084		1,433		22,804		2,675		1,020		106,252
Substandard	1,683		126,863		2,349		17,870		5,415		3,413		157,593
Doubtful	6		334		—		8		—		—		348
Ungraded	—		1,500		—		124,160		172		—		125,832
Total	$	649,157	$	9,026,220	$	351,291	$	2,567,501	$	826,270	$	340,264	$	13,760,703



	December 31, 2017
	Non-PCI noncommercial loans and leases
(Dollars in thousands)	Residential mortgage		Revolving mortgage		Construction and land development		Consumer		Total non-PCI noncommercial loans and leases
Current	$	3,465,935	$	2,674,390	$	239,648	$	1,546,473	$	7,926,446
30-59 days past due	27,886		13,428		7,154		8,812		57,280
60-89 days past due	8,064		3,485		108		2,893		14,550
90 days or greater past due	21,901		10,222		1,379		2,995		36,497
Total	$	3,523,786	$	2,701,525	$	248,289	$	1,561,173	$	8,034,773

	December 31, 2016
	Non-PCI noncommercial loans and leases
	Residential mortgage		Revolving mortgage		Construction and land development		Consumer		Total non-PCI noncommercial loans and leases
Current	$	2,839,045	$	2,576,942	$	229,106	$	1,434,658	$	7,079,751
30-59 days past due	27,760		14,290		1,139		6,775		49,964
60-89 days past due	7,039		2,698		598		2,779		13,114
90 days or greater past due	15,280		7,414		557		1,926		25,177
Total	$	2,889,124	$	2,601,344	$	231,400	$	1,446,138	$	7,168,006



	December 31, 2017
(Dollars in thousands)	PCI commercial loans
Grade:	Construction and land development		Commercial mortgage		Other commercial real estate		Commercial and industrial		Other		Total PCI commercial loans
Pass	$	5,336	$	181,353	$	13,830	$	4,057	$	275	$	204,851
Special mention	320		61,295		323		374		945		63,257
Substandard	5,792		106,807		2,163		1,843		463		117,068
Doubtful	2,206		8,648		808		73		—		11,735
Ungraded	—		—		—		27		—		27
Total	$	13,654	$	358,103	$	17,124	$	6,374	$	1,683	$	396,938

	December 31, 2016
	PCI commercial loans
	Construction and land development		Commercial mortgage		Other commercial real estate		Commercial and industrial		Other		Total PCI commercial loans
Pass	$	8,103	$	234,023	$	8,744	$	7,253	$	696	$	258,819
Special mention	950		67,848		102		620		—		69,520
Substandard	7,850		138,312		3,462		3,648		1,006		154,278
Doubtful	3,863		12,830		337		303		—		17,333
Ungraded	—		—		—		20		—		20
Total	$	20,766	$	453,013	$	12,645	$	11,844	$	1,702	$	499,970



	December 31, 2017
	PCI noncommercial loans
(Dollars in thousands)	Residential mortgage		Revolving mortgage		Construction and land development		Consumer		Total PCI noncommercial loans
Current	$	257,166	$	55,871	$	2	$	2,074	$	315,113
30-59 days past due	10,525		2,767		—		51		13,343
60-89 days past due	4,846		701		642		23		6,212
90 days or greater past due	26,781		4,569		—		42		31,392
Total	$	299,318	$	63,908	$	644	$	2,190	$	366,060

	December 31, 2016
	PCI noncommercial loans
	Residential mortgage		Revolving mortgage		Construction and land development		Consumer		Total PCI noncommercial loans
Current	$	230,065	$	33,827	$	—	$	1,637	$	265,529
30-59 days past due	9,595		618		—		68		10,281
60-89 days past due	6,528		268		—		4		6,800
90 days or greater past due	22,589		3,937		—		63		26,589
Total	$	268,777	$	38,650	$	—	$	1,772	$	309,199

The aging of the outstanding non-PCI loans and leases, by class, at December 31, 2017, and December 31, 2016 is provided in the table below.

The calculation of days past due begins on the day after payment is due and includes all days through which all required interest or principal has not been paid. Loans and leases 30 days or less past due are considered current as various grace periods that allow borrowers to make payments within a stated period after the due date and still remain in compliance with the loan agreement.



	December 31, 2017
(Dollars in thousands)	30-59 days past due		60-89 days past due		90 days or greater		Total past due		Current		Total loans and leases
Non-PCI loans and leases:
Construction and land development - commercial	$	491	$	442	$	357	$	1,290	$	667,925	$	669,215
Commercial mortgage	12,288		2,375		6,490		21,153		9,707,869		9,729,022
Other commercial real estate	107		—		75		182		473,251		473,433
Commercial and industrial	6,694		1,510		1,266		9,470		2,720,937		2,730,407
Lease financing	2,983		167		973		4,123		890,678		894,801
Residential mortgage	27,886		8,064		21,901		57,851		3,465,935		3,523,786
Revolving mortgage	13,428		3,485		10,222		27,135		2,674,390		2,701,525
Construction and land development - noncommercial	7,154		108		1,379		8,641		239,648		248,289
Consumer	8,812		2,893		2,995		14,700		1,546,473		1,561,173
Other	188		6		133		327		301,849		302,176
Total non-PCI loans and leases	$	80,031	$	19,050	$	45,791	$	144,872	$	22,688,955	$	22,833,827

	December 31, 2016
	30-59 days past due		60-89 days past due		90 days or greater		Total past due		Current		Total loans and leases
Non-PCI loans and leases:
Construction and land development - commercial	$	1,845	$	39	$	286	$	2,170	$	646,987	$	649,157
Commercial mortgage	11,592		2,773		10,329		24,694		9,001,526		9,026,220
Other commercial real estate	310		—		—		310		350,981		351,291
Commercial and industrial	7,918		2,102		1,051		11,071		2,556,430		2,567,501
Lease financing	1,175		444		863		2,482		823,788		826,270
Residential mortgage	27,760		7,039		15,280		50,079		2,839,045		2,889,124
Revolving mortgage	14,290		2,698		7,414		24,402		2,576,942		2,601,344
Construction and land development - noncommercial	1,139		598		557		2,294		229,106		231,400
Consumer	6,775		2,779		1,926		11,480		1,434,658		1,446,138
Other	72		—		198		270		339,994		340,264
Total non-PCI loans and leases	$	72,876	$	18,472	$	37,904	$	129,252	$	20,799,457	$	20,928,709

The recorded investment, by class, in loans and leases on nonaccrual status, and loans and leases greater than 90 days past due and still accruing at December 31, 2017 and December 31, 2016 for non-PCI loans, were as follows:



	December 31, 2017				December 31, 2016
(Dollars in thousands)	Nonaccrual loans and leases		Loans and leases > 90 days and accruing		Nonaccrual loans and leases		Loans and leases > 90 days and accruing
Non-PCI loans and leases:
Construction and land development - commercial	$	1,040	$	—	$	606	$	—
Commercial mortgage	22,625		397		26,527		482
Other commercial real estate	916		—		86		—
Commercial and industrial	2,884		428		4,275		440
Lease financing	1,992		—		359		683
Residential mortgage	38,942		—		32,470		37
Revolving mortgage	19,990		—		14,308		—
Construction and land development - noncommercial	1,989		—		1,121		—
Consumer	1,992		2,153		2,236		1,076
Other	164		—		319		—
Total non-PCI loans and leases	$	92,534	$	2,978	$	82,307	$	2,718

Purchased non-PCI loans and leases

The following table relates to purchased non-PCI loans acquired in the Guaranty transaction in 2017 and the Cordia transaction in 2016 and provides the contractually required payments, estimate of contractual cash flows not expected to be collected and fair value of the acquired loans at the acquisition date.



(Dollars in thousands)	Guaranty		Cordia
Contractually required payments	$	703,916	$	296,529
Contractual cash flows not expected to be collected	$	16,073	$	2,678
Fair value at acquisition date	$	574,553	$	241,392

The recorded fair values of purchased non-PCI loans acquired in the Guaranty transaction in 2017 and the Cordia transaction in 2016 as of the acquisition date are as follows:



(Dollars in thousands)	Guaranty		Cordia
Commercial:
Construction and land development	$	—	$	3,066
Commercial mortgage	850		77,455
Other commercial real estate	—		22,174
Commercial and industrial	583		31,773
Other	183,816		—
Total commercial loans and leases	185,249		134,468
Noncommercial:
Residential mortgage	309,612		16,839
Revolving mortgage	54,780		9,867
Consumer	24,912		80,218
Total noncommercial loans and leases	389,304		106,924
Total non-PCI loans	$	574,553	$	241,392

Purchased credit-impaired (PCI) loans

The following table relates to PCI loans acquired in the HCB and Guaranty transactions in 2017 and the NMSB and FCSB transactions in 2016. The table summarizes the contractually required payments, which include principal and interest, expected cash flows to be collected, and the fair value of PCI loans at the respective acquisition dates.



(Dollars in thousands)	Guaranty		HCB		FCSB		NMSB
Contractually required payments	$	158,456	$	111,250	$	58,036	$	50,613
Cash flows expected to be collected	$	142,000	$	101,802	$	50,665	$	42,513
Fair value of loans at acquisition	$	114,533	$	85,149	$	43,776	$	36,914

The recorded fair values of PCI loans acquired in the HCB and Guaranty transactions in 2017 and the NMSB and FCSB transactions in 2016 as of their respective acquisition date were as follows:



(Dollars in thousands)	Guaranty		HCB		FCSB		NMSB
Commercial:
Construction and land development	$	55	$	7,061	$	559	$	125
Commercial mortgage	644		21,836		24,156		26,216
Other commercial real estate	—		6,404		1,158		1,471
Commercial and industrial	2		19,675		1,783		1,847
Other	—		—		1,619		—
Total commercial loans	701		54,976		29,275		29,659
Noncommercial:
Residential mortgage	80,475		25,857		12,518		6,416
Revolving mortgage	33,319		3,434		1,117		121
Construction and land development	26		—		340		—
Consumer	12		882		526		718
Total noncommercial loans	113,832		30,173		14,501		7,255
Total PCI loans	$	114,533	$	85,149	$	43,776	$	36,914

The following table provides changes in the carrying value of PCI loans during the years ended December 31, 2017 and 2016:



(Dollars in thousands)	2017			2016
Balance at January 1	$	809,169		$	950,516
Fair value of PCI loans acquired during the year	199,682			80,690
Accretion	76,594			76,565
Payments received and other changes, net	(322,447		)	(298,602		)
Balance at December 31	$	762,998		$	809,169
Unpaid principal balance at December 31	$	1,175,441		$	1,266,395

The carrying value of loans on the cost recovery method was $345 thousand at December 31, 2017, and $498 thousand at December 31, 2016. The cost recovery method is applied to loans when the timing of future cash flows is not reasonably estimable due to borrower nonperformance or uncertainty in the ultimate disposition of the asset. The recorded investment of PCI loans on nonaccrual status was $624 thousand and $3.5 million at December 31, 2017 and December 31, 2016, respectively.

For PCI loans, improved credit loss expectations generally result in the reclassification of nonaccretable difference to accretable yield. Changes in expected cash flows not related to credit improvements or deterioration do not affect the nonaccretable difference.

The following table documents changes to the amount of accretable yield for 2017 and 2016.



(Dollars in thousands)	2017			2016
Balance at January 1	$	335,074		$	343,856
Additions from acquisitions	44,120			12,488
Accretion	(76,594		)	(76,565		)
Reclassifications from nonaccretable difference	18,901			29,931
Changes in expected cash flows that do not affect nonaccretable difference	(4,822		)	25,364
Balance at December 31	$	316,679		$	335,074